ACT Energy Technologies Ltd. press release
Cathedral Energy Services reports record Q4 and annual revenues for 2014, reduction in capital spending and dividend
TSX - Toronto Stock Exchange · Canada
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/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/
CALGARY, March 4, 2015/CNW/ - Cathedral Energy Services Ltd. (the "Company" or "Cathedral" / TSX: CET) announces its consolidated financial results for the three months and year ended December 31, 2014and 2013. Dollars in 000's except per share amounts.
This news release contains "forward-looking statements" within the meaning of applicable Canadian securities laws. For a full disclosure of forward-looking statements and the risks to which they are subject, see "Forward-Looking Statements" later in this news release.
2014 Q4 KEY TAKEAWAYS
Total revenues up 12% to a record $73,242from 2013 Q4 of $65,238; Record 2014 Q4 total revenues, including: Q4 record for U.S. directional drilling; Q4 record revenue for Canadian production testing;
EBITDAS increased 16% to $9,408from 2013 Q4 of $8,124; 2014 EBITDAS was $38,487($1.06per share diluted) representing a $5,672or 17% increase from $32,815($0.91per share diluted) in 2013
Introduction of new proprietary technologies including: upgrades to our proprietary EM-MWD platform to improve reliability and accuracy; introduction of a real time downhole drilling diagnostics system (HAWK) to optimize drilling performance by minimizing wasted energy, increasing bit life and minimizing equipment damage; and developing our own proprietary MWD gamma sensor design which has improved reliability and reduced system costs;
Introduction of the "Claw" line to our nDurance™ drilling motors series which has generated regular inbound customer inquiries regarding interest in this motor's enhanced performance capabilities and also resulted in standalone rentals of these motors; and
The value of our MWD platform and nDurance™ drilling motors was further demonstrated in 2014 based on us achieving a number of record drilling times for new and existing customers.
| 2014 Q4 AND YEAR END FINANCIAL SUMMARY | | | | | | | | | | | | Three months ended December 31 | Year ended December 31 | | | | | | | | | | 2014 | 2013 | 2014 | 2013 | | | | | | | Revenues | $ | 73,242 | $ | 65,238 | $ | 275,435 | $ | 224,685 | | | | | | | | | | | | | | Adjusted gross margin %(1) | | 20.7% | | 20.7% | | 21.6% | | 23.1% | | | | | | | | | | | | | | EBITDAS (1) | $ | 9,408 | $ | 8,124 | $ | 38,487 | $ | 32,815 | | | | Diluted per share | $ | 0.26 | $ | 0.22 | $ | 1.06 | $ | 0.91 | | | As % of revenues | | 13% | | 12% | | 14% | | 15% | | | | | | | | | | | | | Funds from operations (1) | $ | 8,395 | $ | 6,400 | $ | 32,114 | $ | 25,359 | | | | Diluted per share | $ | 0.23 | $ | 0.18 | $ | 0.87
9 | $ | 0.70 | | (Write-down of) recovery on investment in associate and related assets | $ | 177 | $ | (13,066) | $ | 177 | $ | (13,070) | | | | | | | | | | | | | | Earnings (loss) before income taxes | $ | 3,063 | $ | (11,394) | $ | 14,970 | $ | 1,114 | | | | Basic per share | $ | 0.08 | $ | (0.32) | $ | 0.41 | $ | 0.03 | | | Diluted per share | $ | 0.08 | $ | (0.32) | $ | 0.41 | $ | 0.03 | | | | | | | | | | | | | Net earnings (loss) | $ | 1,776 | $ | (11,248) | $ | 9,771 | $ | (1,542) | | | | Basic per share | $ | 0.05 | $ | (0.31) | $ | 0.27 | $ | (0.04) | | | Diluted per share | $ | 0.05 | $ | (0.31) | $ | 0.27 | $ | (0.04) | | | | | | | | | | | | | Dividends declared per share | $ | 0.0825 | $ | 0.0825 | $ | 0.3300 | $ | 0.3075 | | | | | | | | | | | | | | Property and equipment additions (cash) | $ | 3,826 | $ | 6,736 | $ | 30,763 | $ | 28,283 | | | | | | | | | | | | | | Weighted average shares outstanding | | | | | | | | | | | | Basic (000s) | | 36,295 | | 36,158 | | 36,244 | | 36,171 | | | Diluted (000s) | | 36,295 | | 36,223 | | 36,255 | | 36,241 | | | | | | | | | | | | | | | | | | | December 31 | | December 31 | | | | | | | | | 2014 | | 2013 | | | Working capital | | | | | $ | 38,135 | $ | 26,031 | | | | | | | | | | | | | | Total assets | | | | | $ | 230,534 | $ | 205,375 | | | | | | | | | | | | | | Loans and borrowings excluding current portion | | | | | $ | 56,142 | $ | 38,462 | | | | | | | | | | | | | | Total shareholders' equity | | | | | $ | 128,368 | $ | 126,612 | | | | | | | | | | | | | | (1) see "NON-GAAP MEASUREMENTS" | | | | | | | | | |
OUTLOOK
Following a successful year for Cathedral in 2014 we are now faced with the reality of a rapid decline in oil prices in 2015 with a lot of uncertainty around how long these low prices may last. Coupled with the recent oil price decline is soft natural gas pricing. Both these factors have resulted in our customers reducing their capital spending budgets in 2015 which has a direct impact on our business. Industry analysts are predicting a 40% to 50% activity declines over 2014 which is similar or worse than what was experienced in the 2008/2009 downturn.
Our strategy with dealing with this current reality is three fold:
1. Adjust our cost structure and financial obligations to reflect the decline in activity levels and protect our balance sheet;
2. Preserve our key employee base so when industry conditions improve we are able to ramp up quickly; and
3. Continue to pursue operational improvements and execute on our strategic objectives to position Cathedral to be a stronger company in the future.
With respect to aligning our cost structure with the current environment we began to aggressively implement expense reductions in early January. Approximately 55% of our expenses are labor, much of which is variable depending on activity levels. We have undertaken a workforce reduction primarily focusing on positions that will be directly impacted by lower activity in the field, shop and office. We have implemented wage rollbacks across the Company, including our directors, ranging from 5% to 20% depending on the position and pay level. Employee benefit programs have also been reduced. We are reviewing all expense items looking for savings opportunities both short and long-term. Our capital expenditure program in 2015 has also been reduced significantly from 2014 to target a capital spend in the $7,000range. Capital spending in 2015 will be largely offset by the sale and leaseback of our Oklahoma Cityfacility in the March timeframe which we anticipate will generate net proceeds of $4,800and proceeds from redundant asset disposals. We have also reduced our quarterly dividend to $0.04per common share (previously $0.0825) to manage liquidity, maintain a strong balance sheet and better position the Company to take advantage of opportunities which may present themselves.
As much as 2015 will be a challenging year for Cathedral we also see opportunities. The current energy company focus on costs is an opportunity for Cathedral to offer performance advantages that can impact their overall drilling program. For example, our ability to assist our customers in shortening drilling times has an impact on all the site services they require which can create significant cost savings overall. It is also an opportunity for Cathedral to demonstrate our technology and service capabilities in new areas as both existing and potential customers are more receptive to gaining efficiencies. The slowdown also affords Cathedral the opportunity to implement a number of sales and operational performance improvements which will benefit the Company in the long-term. We are confident that we will come out of this current downturn in a very strong position to deliver increased value to our customers and our shareholders.
DIVIDENDS
It is the intent of the Company to pay quarterly dividends to shareholders. The Board of Directors review the amount of dividends on a quarterly basis with due consideration to current performance, historical and future trends in the business, the expected sustainability of those trends and enacted tax legislation which will affect future taxes payable as well as required long-term debt repayments, maintenance capital expenditures required to sustain performance and future growth capital expenditures. The Directors have approved a 2015 Q1 dividend in the amount of $0.04per share which will have a date of record March 31, 2015and a payment date of April 15, 2015, 2015.
ANNUAL AND SPECIAL MEETING
Cathedral will be holding its Annual and Special Meeting ("Meeting") in the Plaza Room of the Metropolitan Centre, 333 - 4th Avenue S.W., Calgary, Albertaat 3:00p.m. (MT)on Monday, May 11, 2015. Business at the meeting will include the election of directors, appointment of auditors and consideration of approving unallocated entitlements under Cathedral's stock option plan. Mr. Dan O'Neilhas indicated he will not be running for re-election at the Meeting. On behalf of Cathedral, we would like to thank Dan for his contributions to the company, his insights into the energy industry and wish him well in his future business endeavors.
2015 CAPITAL PROGRAM
Cathedral's 2015 capital budget has been revised downward from the originally announced amount of $15,000 to $7,000. The new capital budget includes $5,100of growth capital, $1,400of maintenance capital and $500of infrastructure expenditures.
The Directional Drilling division is expected to invest $5,750of the 2015 capital budget including $3,915for growth, $1,335for maintenance and $500for infrastructure. Growth capital expenditures will include the addition of nDurance™ motors and drill collars for the replacement of high rental expense items and certain MWD equipment. Maintenance capital expenditures are related to motors, trucks and EM/MWD equipment. The infrastructure investment of $500relates to the remaining construction costs for an operations facility in Oklahoma Citywith full service repair capabilities. Cathedral has entered into a Purchase and Sale Agreement related to the facility being built in Oklahoma Cityand will enter into a lease for the facilities with the purchaser. The Company expects this transaction to close approximately March 31, 2015with net proceeds of approximately $4,800.
The Production Testing division anticipates investing a total of $1,250. Growth capital expenditures of $1,185are related to storage tanks and additional equipment that would otherwise be rented. Maintenance expenditures of $65are mainly related to purchase of ancillary equipment.
Cathedral intends to finance its 2015 capital budget from cash flow from operations, proceeds of the Oklahoma Cityfacility sale and leaseback, proceeds from redundant asset sales and if necessary, its existing credit facility.
2014 CAPITAL PROGRAM
In 2014 the Company invested an additional $30,763(2013 - $20,283) in property and equipment, excluding non-cash capital lease additions. The major additions for growth capital were $12,608for additional directional drilling motors and related equipment for specific job requirements and $2,935for additional ancillary production testing equipment which will reduce future rental costs. Infrastructure capital relates to progress payments on the construction of an operating facility in Oklahoma Citywhich is expected to be operational in early 2015 and computer system upgrades. Maintenance capital included additional upgrades to existing production testing equipment and maintenance of downhole tools. The net property and equipment additions (additions net of proceeds on the regular disposal of property and equipment) to date in 2014 were $25,213(2013 - $20,996).
| The following table summarizes the capital expenditures (cash basis): | | | | | | | December 31 | December 31 | | | | | | 2014 | | 2013 | | Growth capital (1) | $ | 15,543 | $ | 12,897 | | Replacement capital (1) | | 1,257 | | 2,498 | | Infrastructure capital (1) | | 4,324 | | 1,330 | | Maintenance capital (1) | | 9,639 | | 11,558 | | Property and equipment expenditures | | 30,763 | | 28,283 | | Less: proceeds on the regular disposal of property and equipment | | (5,550) | | (29,547) | | Add back: non-recurring proceeds on disposal of property and equipment | | - | | 22,260 | | Net property and equipment additions (1) | $ | 25,213 | $ | 20,996 | | (1) Refer to MD&A "NON-GAAP MEASUREMENTS" | | | | | | The following is a summary of major equipment owned by the Company: | | | | | | | December 31 | December 31 | | | | | | 2014 | | 2013 | | Directional drilling - MWD systems | | 140 | | 139 | | Production testing units | | 66 | | 72 |
| RESULTS OF OPERATIONS – THREE MONTHS ENDED DECEMBER 31 | | | | | | | | | | | | | | | | | | Three months ended December 31, 2014 | | Three months ended December 31, 2013 | | | | | | | | | | | | | | | Directional | Production | | | Directional | Production | Resale and | | | | | | | | | | Revenues | drilling | testing | Total | | drilling | testing | rental | Total | | | | | | | | | | | | | | | | | | | | | | | | | | Canada | $ | 22,582 | $ | 7,656 | $ | 30,238 | | $ | 19,320 | $ | 9,241 | $ | - | $ | 28,561 | | | | | | | | | | | | | | | | | | | United States | | 32,408 | | 10,596 | | 43,004 | | | 23,536 | | 7,150 | | - | | 30,686 | | | | | | | | | | | | | | | | | | | International | | - | | - | | - | | | - | | - | | 5,991 | | 5,991 | | | | | | | | | | | | | | | | | | | Total | $ | 54,990 | $ | 18,252 | $ | 73,242 | | $ | 42,856 | $ | 16,391 | $ | 5,991 | $ | 65,238 |
Revenue 2014 Q4 revenues were $73,242which represented an increase of $8,004or 12% from 2013 Q4 revenues of $65,238. The increase was primarily attributed to the U.S. directional drilling and U.S. production testing divisions which both achieved record Q4 revenue results.
Canadian directional drilling revenues increased to $22,582in 2014 Q4 from $19,320in 2013 Q4; a 17% increase. This increase was the result of: i) an 13% increase in activity days to 1,896 in 2014 Q4 from 1,683 in 2013 Q4; and ii) a 4% increase in the average day rate to $11,910in 2014 Q4 $11,480in 2014 Q4. For western Canada, the number of wells drilled declined in 2014 Q4 on a quarter over quarter basis from 2013 Q4 and the increase in Canadian activity days represents a market share gain.
U.S. directional drilling revenues increased to a record level of $32,408in 2014 Q4 from $23,536in 2013 Q4; a 38% increase. This increase was the result of: i) a 22% increase in activity days of 2,477 in 2014 Q4 from 2,027 in 2013 Q4; and ii) a 13% increase in the average day rate of $13,084in 2014 Q4 from $11,611in 2013 Q4 (when converted to CADs). The increase in U.S. activity days were due to the Texasand Oklahomamarkets, with increased activity coming from both existing and new customers. The 13% increase in day rates is a combination of day rate increases in USD (4%) and in part due to strengthening of the USD versus the CAD (9%). The average day rate increase in USD was due to performance based pricing, this was partially offset by lower pricing in the Oklahomaregion.
Canadian production testing revenues decreased to $7,656in 2014 Q4 from $9,241in 2013 Q4; a 17% decrease. The Canadian operating days were down 22% based on work declines from specific existing customers mainly due to the clients expending their maximum capital budget. 2013 Q4 had one of the highest activity levels in Company history. The activity decline was partially offset by increased day rates achieved from customers using multi-pad well programs that require additional ancillary equipment and on-site staff.
U.S. production testing revenues increased to a record level of $10,596in 2014 Q4 from $7,150in 2013 Q4; a 48% increase. Both activity levels and day rates increased as the division has replaced and then exceeded the lost work from a customer that shifted to a competitor in late 2013. The 38% increase in day rates is a combination of day rate increases in USD (27%) and in part due to strengthening of the USD versus the CAD (11%). The increase in USD day rates related to benefit of revenue from additional equipment and staff due to a shift in the nature of work.
The international resale and rental revenue was nil in 2014 Q4 as the Company decided to terminate its pursuit of operations in Venezuela.
Gross margin and adjusted gross margin Gross margin for 2014 Q4 was 13.5% compared to 12.9% in 2013 Q4. Adjusted gross margin (see Non-GAAP Measurements) for 2014 Q4 was $15,155(20.7%) compared to $13,474(20.7%) for 2013 Q4. The maintenance of the adjusted gross margin percentage was primarily due to declines in labour costs resulting from an ongoing effort to maintain a cost effective mix of staff and offset by increases in repair and rental costs resulting from overall increased activity.
Depreciation allocated to cost of sales increased to $5,231in 2014 Q4 from $5,036in 2013 Q4. As a percentage of revenue, depreciation included in cost of sales decreased to 7.1% for 2014 Q4 from 7.7% for 2013 Q4.
Selling, general and administrative expenses ("SG&A")SG&A expenses were $6,377in 2014 Q4; a decrease of $342compared with $6,719in 2013 Q4. As a percentage of revenue, these costs were 9% in 2014 Q4 and 10% in 2013 Q4. Adjusted SG&A (see Non-GAAP Measurements) was $5,963in 2014 Q4 compared to $4,973in 2013 Q4, an increase of $990. Adjusted SG&A increased primarily due to wages, benefits and variable compensation. These increases related to increased sales commissions and additions to research and development personnel. In addition, adjusted SG&A was also higher due to higher insurance costs resulting from increases in activity.
Gain on disposal of property and equipmentDuring 2014 Q4 the Company had a gain on disposal of property and equipment of $392compared to $1,462in 2013 Q4. The Company's gains are mainly due to recoveries of lost-in-hole equipment costs including previously expensed depreciation on the related assets. The timing of lost-in-hole recoveries is not in the control of the Company and therefore can fluctuate significantly from quarter-to-quarter. In 2013 Q4 there was an adjustment to gain on disposal of land and buildings resulting in a decrease in previously recognized gain of $460(2014 – nil).
Write-down/recovery of investment in associate and related assetsCathedral decided to terminate its pursuit of operations in Venezuela. As a result in 2013 Q4, the Company recorded a charge in the amount of $13,070related to the write-off of its investment in Vencana as well as certain assets located within Venezuela. During 2014 there was a minor recovery in the amount of $177. Cathedral will attempt to sell its interest in Vencana and any proceeds with respect to the sale of its joint venture interest will be recorded on a cash received basis as a recovery of this write-down.
Foreign exchange loss The Company had foreign exchange loss of $335in 2014 Q4 compared to a loss of $372in 2013 Q4 due to the fluctuations in CAD compared to USD. The Company's foreign operations are denominated in a currency other than CAD and therefore, upon consolidation gains and losses due to fluctuations in the foreign currency exchange rates are recorded in other comprehensive income ("OCI") on the balance sheet as a component of equity. However, gains and losses in the Canadian entity on U.S. denominated intercompany balances continue to be recognized in the statement of income. Included in the 2014 Q4 foreign currency gain are unrealized losses of $452(2013 Q4 - $336) related to intercompany balances.
Finance costs Finance costs consist of interest expenses on operating loans, loans and borrowings and bank charges of $699for 2014 Q4 versus $661for 2013 Q4.
Income taxFor 2014 Q4, the Company had an income tax expense of $1,287compared to a recovery of ($146)in 2013 Q4. The effective tax rate for 2014 Q4 was 42%. Under IFRS, the quarterly tax provisions are based upon an estimated annual rate and the company did not utilize non-capital losses to the extent that was planned in the quarterly provision. As a result, 2014 Q4 effective rate is higher than the annualized rate for 2014.
Included in the 2013 Q4 amount is an adjustment to prior year's deferred tax recovery of $313. Due to the write-off of investment in associate in the 2013 Q4 the effective tax rate is not meaningful and is not presented.
LIQUIDITY AND CAPITAL RESOURCES
OverviewOn an annualized basis the Company's principal source of liquidity is cash generated from operations. In addition, the Company has the ability to fund liquidity requirements through its credit facility and the issuance of debt and/or equity. For the year ended December 31, 2014, the Company had funds from continuing operations of $32,114(2013 - $25,359). The increase in funds from continuing operations is due to stronger earnings.